Paul Krugman on the Irish Economy Post author By Philip Lane Post date April 19, 2009 Paul Krugman gives his views on the Irish Economy (the blog) and the Irish Economy (the real thing) here. Update: Paul has now written a longer article on the Irish situation – it is here. Categories In Economic Performance, World Economy Tags Krugman on Ireland 39 Comments on Paul Krugman on the Irish Economy ← On Nationalisation → A NAMA for Germany? 39 replies on “Paul Krugman on the Irish Economy” I wonder what he means by Ireland having “hit the limits of anti-recession policy”? It’s not like we ever tried a stimulus package here and have now been forced by the bond markets to reverse course. Since the beginning of the recession fiscal contraction would appear to have been the only response on the agenda. OK, I’ll be devil’s advocate. We only hit the limits of anti-recession policy when we take on enough debt that we either fall victim to the whims of the IMF/ECB, or just go for an old-fashioned default. Krugman’s point about Ireland’s economic policy been decided by our lenders is a valid one. The tail is certainly wagging the dog.. A more important question is what’s wrong with cutting spending in a recession, especially when it’s historically resulted in the quickest recoveries. Krugman’s ultra-Keynesian advice is based on the assumption that the Irish economic situation is similar to the American situation. Since he has all the answers to America’s problems, then he can solve Ireland’s without breaking stride. One of the most crucial differences, which he doesn’t understand yet, is that Ireland can’t print hundreds of billions of dollars to finance hundreds of billions of dollars in new debt. America’s ability to print the world’s reserve currency has enabled it to get away with vast spending programs that would quickly destroy smaller countries that are at the mercy of the ECB or global credit markets. (Of course, if the Celtic Tiger had built up huge stockpiles of foreign reserves, as did some of the Asian Tigers…) I hope the Professor continues to read this blog and study the Irish economy. He will gain enormous insights into the American economy. Sorry, but Krugman offers little new insight into Ireland in this article. This seems a classic case of his editor saying “I’ve heard a lot of things about the Irish economy being in a mess, can you gimme an article on them by the end of the day?”, and Krugman scans a few research reports, calls a few economists or academics he knows, and drums up something in a few hours. The house financial reporter could’ve typed this up, so i’d much prefer to read a truly in-depth analysis of the issues facing us here from Krugman. By the by, in running a 10.75% deficit aren’t we already running a fairly stimulatory fiscal position? The fact that it would have been 15%+ before the emergency budgetary measures is merely a recognition that any more would’ve been unsustainable and counter productive. Owenc : we cannot equate a deficit at any level to stimulation. Its a measure of the gap between spending and revenue. Is it really fair of Krugman to suggest that we should engage in stimulus spending in Ireland? I assume that such money would leave our economy far more quickly than it would the US. It’s almost akin to suggesting Florida get expansionary… @owenc: Sorry, again pressed the button too rapidly Krugman is not writingfor the irish audience. he is drawing policy parallels between two advanced economies and the US, and I think his last point is the takehome “And the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks.” @Brian: fair point about Krugman not writing for our benefit, but guys like Krugman and Roubini, operating in a ‘glow period’ of sorts right now, are being asked to give opinions on so many varying topics all across the globe that you often feel they’re just giving you their basic summary position, and yet lots of people will still put huge weight behind their words. @OwenC Indeed. But , do you disagree with anything he says : I think not from your analysis (the deficit issue is a measurement issue). So if he weighs in with his views, and they are shallow but accuract, whats not to like? Even if its Krugman, its only the papers…. Krugman isn’t calling for stimulus spending in Ireland; he says “As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.” He *is* saying that this lack of options is going to make the recession worse than it otherwise would have been, which is of course true. And, one could add, the fact that we have no options is a pretty damning indictment of Irish governments of the last 10 years. Pat MacAuley, I’m fairly sure that Krugman does in fact understand that we don’t have an independent monetary policy (i.e. “that Ireland can’t print hundreds of billions of dollars to finance hundreds of billions of dollars in new debt”). Regarding the idea that we should have built up huge foreign currency reserves – as I understand it the Asian economies did this in order to ward off a run on their currency in the wake of the 1998 financial crisis, so I’m not sure how this would have helped us since we don’t have a currency to protect. @LorcanRK Sovereign debt default is not an option. It would blow up EMU and the EUR could collapse as currency speculators would pounce. The Maastricht Treaty and specifically the Stability & Growth Pact in theory should prevent this from happening. The likelihood of a European or IMF bailout remains high – possibly 50:50 – if Ireland does not reduce the deficit. Remember the Mexican Peso crisis 1994 was prompted by a deficit half the size or ours today. Krugman’s point that we are between a rock and a hard place is well made. We do not have any choice now but to cut Public spending at a time when the government have no choice but to bail out the banks. What nobody seems to be talking about is the fact that if the global economy does pick-up in 2011 that interest rates will be a lot higher than they are today – Euribor Futures pointing to 3% ECB ReFi rate then. Even if Dr. Fitzgerald is correct that Ireland will stage an export-led recovery, it is entirely possible that we could have 2-3% GDP growth plus 15% still unemployed plus 400 billion in Private Sector Credit plus a National Debt in excess of 100 billion euros with an associated interest burden of 5-6 billion per year. Socialisation of private debt into public is a necessary evil. It is one that is internationally recognised, hence the Krugman piece. My own reading of Krugman’s article is “there by the grace of God go I” and Ireland is being forced into policy action to use Harold MacMillan’s words by: “Events, my dear boy events”. I agree with Kevin O’R (and by implication Garrett FitzGerald in Saturday’s IT) – that we are somewhat option-less at this point is a de facto criticism/indictment of government policy since 2000. Analysis of teachers’ wages in Ireland (http://short.ie/teachers) shows that not only do they pay less tax than their counterparts elsewhere in the eurozone (as all Irish workers do), they are also extremely well paid in gross terms, particularly taking into account days holidays. (Blame benchmarking.) In Ireland, a teacher in the job 15 years, single with no kids, earns more AFTER tax than his or her counterparts do BEFORE they’ve been taxed in most other eurozone members. In Finland, prices are just 2% below Irish prices, but an Irish teacher enjoys a wage that is 54% higher than a Finnish counterpart. Put quite roughly, due to its crazy trajectory over the last ten years, public spending will have to fall, and due to the global recession, taxes will have to rise. I think some of the commenters are misinterpreting what he said. I don’t think that Krugman is suggesting that we should be seeking to expand, at this time, I’m sure he knows very well that we can’t. As a Keynesian, he is merely concerned about the pro-recessionary effect that cuts in spending can have, and he obviously thinks that the Govt are pushing this to the limit, beyond which we would simply be crippling our economy. Ok, we’re now seeing Irish bonds/CDS come under a bit of pressure as the Krugman article is getting a bit of attention at the US open. This was my point of frustration earlier – while he hasn’t said anything i disagree with, i stick with my view that its a fairly bland and detail-free piece, that generally just has a negative tone to it. As its Krugman, this gets magnified quite a bit. A bond trader i know just said, “he gets a nobel prize and thinks he’s an expert in everything”. @Derek Brawn. Firstly, just finished your book. A good read, even if the subject matter is a bit depressing. Re the sovereign default. I wasn’t suggesting it is an option for Ireland, was just pointing out that it would mark the end of ‘anti-recession policy’. Until that point, there is always a chance that we may get over the current bank impasse and make some reasonable effort to sustain and grow the economy. Over the last three months, Ireland has tightened fiscal policy twice and the ten-year spread against bunds has come in 100 bp. It’s still 200 or so, but the tightening is not being done for fun. For poster James Conran…… Ireland has had a stimulus package…… roll the clock back to 2001 after September 11th growth stumbled globally, there were exceptions – Ireland was one idiots at Anglo and others were tapping easy cash on global markets and dispensing it in wheel barrows to any gombeen with a plot of land and political connections. Call it what you will but it equated to what we can now call ‘a stimulus package’ We have had our ‘stimulus package’ and it has bankrupted us. thus reinforcing the Ireland being ‘read as a prediction for the world economy’ by Krugman things are about to get alot more interesting… But the Irish government can print billions of euros… they’re called treasuries. With the nod from the ECB for NAMA, the government is going to issue treasuries directly to the banks either in an asset swap for loans or one for equity. And all this without going to the bond market to see what they should be priced at. How much of this stuff? 70 bn this year. How much next year? Who knows… I doubt the Nobel has changed Krugman much – it has merely magnified any public comment he makes now. He has become Greenspan for the current period. It seems a bit myopic to view critique this article on how it affects Ireland directly and immediately. Ireland’s future will be much more dramatically affected by how the USA gets out of its hole and whether it follows the advice of Krugman, Stiglitz and others. Krugman does us the courtesy to acknowledge that Ireland had all but been forced to put the guarantee in place and to address it’s deficit with tax increases and spending cuts. The thought that the USA and the UK could end up in the same position is very scary for Ireland indeed. We should be concentrating on getting the best performance from the team and not crying about the guy from the parish getting a raw deal. If Krugman’s advice for the USA is good advice and if Ireland is a cautionary tale then let’s leave the emotion out of it and give him credit. Is he right for the USA though? That is the big question. Hmmm, I don’t think Krugman would agree that he is as influential as Greenspan was – Greenspan was running the show policy-wise, Krugman is influencing the debate but his advice doesn’t even seem to be sought by the Obama admin (with whom he has been at loggerheads on both financial and fiscal policy)… @ Colm. True, 10-year Irish Gilts are now trading at +209bps spread to Bunds having been as wide as +262 bps during February. But looking ahead – with Sovereign Debt issuance set to exceed Corporate Credit, as well as a big absolute increase in European deficits – the chances are that in 2-3 years time 10-year German yields will be closer to 5% (or above) than where they are today at 3.3%. Agree that fiscal measures have tightened in Irish sovereign spreads, but with large deficits forecast until 2013 how likely is it that Eire will once again trade flat to Bunds in the medium term? if only we had euro hegemony and political as well as monetary union, then we could just create money perpetually like the US and in the short term like UK….. given that we can’t I think the steps we are taking for now are rational ones, designed to deliver the medicine we need, when will people stop crying and swallow the pill? there is also a bullet or two left in the gun regarding public spending, but that would involve taking on the unions and that is really where the end game lies to a degree, because that side of the balance sheet cannot continue as it is or all of the heavy lifting is pointless. @Derek Brawn – Germany might do some catching up given their depressing output announcements rather than us ‘recovering to them’, Ireland is ahead of the curve in the plans made/executed – the Bund, sorry ECB seem set on an austerity route thus far. It doesn’t have to be the eternal benchmark, in the US on the muni’s (which is likely the closest we can draw to our independent national debt issuances) saw the likes of California change versus their historic position. It’s all relative. 1. Responding to one of the contributors yesterday I mentioned the idea of a Debt Jubilee as one of the processes that might help lessen the thump as we ‘land’. Anyone any Words-of-Wisdom on the pros and cons of a Debt Jubilee, specifically in respect of the ‘underwater’ mortgages for private homes? Private housing prices will revert to mid-1990s levels, so ‘negative equity’ could be a real problem. 2. Exporting our way out of this mess is a non-starter. This point should be completely obvious by now, if not … …. 3. A Knowledge Economy. How many PhDs could Chindia produce? Think again lads – especially about the level of their wages! 4. Agriculture. Yes, providing you can maintain productivity WITHOUT fossil-fuel derived fertilizers. End of commercial farming as we know it? As for Prof Krugman – “paper never refuses the ink!” Brian P @Brian: An idea touted in the US about 1-year ago was debt forgiveness, a figure of 25% was used as this was believed to represent the average fall in house prices at that time. Socialisation of private debt into public hands principle has been firmly established with the NAMA proposal. Regarding potential negative equity for Irish first-time-buyers, it could total between EUR 10-12 billion by end-2010 affecting some 200,000 homes (based on IBF quarterly mortgage data and PTSB-ESRI FTB sub-Index). If the State can potentially take a hit of upwards of EUR 20-30 billion to save the Banks, then surely something must be done to alleviate the growing negative equity problem. Whatever about an export-led recovery, demand destruction of private consumption due to the wealth-effect could easily result in a larger output gap persisting for longer. The cons would be in deciding to whom & by how much. The pros would be that the State would have to extend the favour to non-homeowners – perhaps by way of a tax credit or subsidy for buying a new home (would also assist in reduce the unsold inventory of new homes). There are dramatic differences between Krugman’s first post (Shabby Celtic Tiger) and his update (Erin Go Broke) the next day. Maybe he fleshed out his original thoughts, and maybe he read some of the responses on this site and his own blog. Either way, the changes are much for the better. In his update Krugman is clear that Ireland’s fiscal tightening is caused by Ireland’s ‘fiscal straitjacket’ rather than by some neo-Hooverian mindset. Maybe more important, Krugman acknowledges that America may not be able to rely on massive deficits indefinitely. At some unknown point the supply of credit (and demand for dollars) will reach saturation, and the USA will be in Ireland predicament. This is the first time I have seen him say this — usually his advice has been to err on the side of more stimulation rather than less. If he has gained this insight from examining Ireland’s economy, then I’m glad some good has come from this. James Conran, You’re right that post-1998 a major motivation for the Asian Tigers to build up dollar reserves was to protect their currencies. But just as important was the determination to amass large reserves that would guarantee that they could pay their dollar-denominated debts and never again suffer the painful and humiliating controls imposed by the IMF. China made the point that it was largely unaffected by the 1998 crisis, because of its growing dollar reserves and small external debt. The Asian Tigers are not really a homogenous group, so their motives and responses have varied, but most of them post-1998 have under-valued their currencies to the dollar. Currency-undervaluation has not only discouraged speculative attacks against their currencies but it has helped build up the dollar reserves of several Asian Tigers to the point that they can fund economic stimulus independently of international credit concerns. America has been even more guilty than Ireland of not saving during the boom years to finance deficits in the recession years. (Krugman notes that Bush blew it on tax cuts and the Iraq war.) Government budget surplus during the boom years is hard-core Keynesian economics, and should be practiced irrespective of the need to support the currency. The Tanaiste responds: http://www.irishtimes.com/newspaper/finance/2009/0421/1224245070922.html?via=mr And another missile from Mr. Krugman: http://krugman.blogs.nytimes.com/2009/04/20/irish-cronies/ “I’ve been getting some reactions from the Emerald Isle, and a lot of them come down to this: OK as far as it goes, but I didn’t sufficiently emphasize the crony capitalism aspect. True: I was aware of all that, but it didn’t make it into my story, and perhaps it should have. Of course, today’s column was essentially “America in an Irish mirror.” How does the cronyism affect that? In Ireland you had key government officials with close personal — and, in some cases, financial — ties to the people inflating the bubble. And there are complaints that despite the crisis that hasn’t changed. So, do we have anything like that here? What do you think?” We should not accept Krugman’s assertion that “In Ireland you had key government officials with close personal — and, in some cases, financial — ties to the people inflating the bubble”. I don’t think any Irish Bank has had the connection to Irish Governments and Irish Ministers in the way that Goldman Sachs has been connected to the US Treasury. Perhaps Mr. Krugman doesn’t realise that under our Public Servants are not newly appointed by each incoming administration. Ireland is a small country which had a limited number of university graduates in the 1960s and 1970s and which has a capital city of approximately one million. It is natural for highly successful people with overlapping interests to be familiar with each other in Dublin. The same cannot be said of the USA, a country of 250+ million and has had father and son presidents in the last 20 years as well as a husband and wife each going for president. Crony capitalism and crony politics seems to be a disproportionately big problem in the USA, one of the oldest and most venerable of the existing western democracies. Krugman’s comments are a straight slur without explanation or qualification and without regard to their impact on a small economy. We are all angry about the mismanagement that has got us into this mess, but Krugman’s repetitions of Enda Kenny’s and Joan Burton’s unfounded allegations in the Dail are hugely harmful. @zhou_enlai I entirely agree with you. Given the smallness of this country the buddy buddy network has come into sharp focus here – not to excuse it and it needs tackling, but we are definitely not unique in this regard. It is especially damaging when Joan Burton et al serve up their nakedly partisan (often unfounded and uninformed) opinions on this issue through the international media (CNBC, the Guardian etc.) Zhou Enlai, Your moniker strikes me as being very apt. The real Zhou was a creature of the party. Any such allegiances yourself. That you, and so many others, think the comments are unfounded is one of the scary things in Irish society. And on we slide down the greasy pole. @zhou_enlai/John15: I also agree. This is not a self denial issue – we all know we are in trouble but if we dont get the sales pitch positive overseas it can and will be worse. At least some balanced analysis versus ignorant headline grabbing sensentionist reporting. In this case from the US, but mostly from the UK media – with a tinge of prejudice. That said, in was noteworthy to see this letter (with a positive spin) appear in todays Financial Times. “Don’t write Ireland’s epitaph just yet Published: April 22 2009 03:00 | Last updated: April 22 2009 03:00 From Mr John White. Sir, Ireland moved away from being a sweatshop many years ago (Letters, April 20), indeed in the latter part of the 1990s Fruit of the Loom closed its factory in the north-west. As a clothing manufacturer it represented the final act in one part of Ireland’s economic story, while the opening of Intel’s new factory at that time represented the next phase of the country’s economic development. Today, global corporations from Facebook to Google, Pfizers to Boston Scientific conduct advanced research and development in Ireland. They are there because of the quality of the workforce, the pro-business low-tax regulatory regime, and the commitment from key stakeholders in the economy to support businesses both small and large to succeed. Yes Ireland does have challenges, but they are not chronic. Ireland is adjusting wages, increasing taxes and stabilising its finances. Can you think of another European country that in one year can raise taxes by 5 per cent of gross domestic product, cut spending, reduce wages by an average of 8-10 per cent and suffer no major industrial unrest? I think it is time people started to give credit to what Ireland is doing because, in the end, it will come out of this recession far leaner and stronger than before. Do not write Ireland’s economic epitaph just yet. John White, London, UK” I think it is reasonable to say that “the people inflating the bubble” included builders as well as bankers – these would be the people with close personal/financial links to our ruling party (going back 40-odd years now). The only people that deny there is massive political cronyism in Ireland are being deliberately blind, deaf or obtuse. In fact, they are playing a very dangerous game of trying to hide the obvious truth. Until the denial stops the problems will continue to accelerate. Our society is riddled with this cancer, we have at least, 800 Quango’s populated by 6000 “political appointees”. We even have people who preach on RTE documentaries about “rip of Ireland” sitting on quango’s. If anyone wants practical examples of waste look at the e-voting debacle or, read about, Garda Pat O’Sullivan’s comments at a recent GRA central committee meeting, where it was suggested that the OPW, is so wasteful, that it should be disbanded! There are many things in Ireland that need this treatment! Under the OPW, it cost 4,500 Euro for 10 sq, yards of linoleum for Churchill Garda station another Euro 1,100 to replace three bulbs in another station. The waste is endless across all departments. In theory, it could go on forever, were it not for the fact that we are running our of credit both social and financial among our international partners. Especially, the ones that buy our bonds. However, it is worryingly obvious, that NAMA will be the mother of all Quango’s. As evidenced by the rush of applicants getting in their C.V’s. Up to last weekend, there was 800 applicants trying to scramble on board. The only people that defend the indefensible in Ireland;- busily applying to get on board the biggest gravy train in the history of the state. If Mr. Krugman were to turn his searing analysis on the Irish economy, it’s bloated and obscene public service, who operate hand in hand with the public service unions, then, I am sure he could tell a mesmerizing tale of woeful proportions that has been visited on the ordinary citizens of this country. Recently, we had financier Dermot Desmond wondering out loud about nationalization of the banks. It would be a bad idea he surmised. The reason given, was, that the government would not be able to run them. Then he turned his attention to NAMA and wondered out loud about the governments ability to run that too! So what are our choices? Maybe, Brian Lucy can take me out of my misery! I am in the same camp as Desmond on this one. Basically, our government have proved, time and time again, that they are incapable of running practically anything. So where are the solutions going to come from? Of course, I can come up with many practical solutions. I fully agree with Jim Power in today’s Irish Times 29th April ’09 that 5 or 6 billion could be saved within the HSE alone and that we would have no loss of front line services. A lot of my ideas would involve slimming down government departments, eliminating quango’s, sacking whole boards of directors as well as setting up a “think tank” with very, very, few politicians allowed to participate. This is the future if we are to have a future! Mr. Krugman has recently turned his “searing analysis” on the Irish Economy. When asked what the prognosis was for Irish people over the next 5 years he answered with one word! “SUFFER”. It might help to know that Mr. Paul Krugman is a very polite gentleman! For the Krugman fans out there, here’s the link to his current lecture series in the London School of Economics. http://www.lse.ac.uk/collections/LSEPublicLecturesAndEvents/ The lectures run over three days this week (monday, tuesday and wednesday) kicking off at 18:30 each evening. 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